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International tax

Israel Highlights 2012 Investment basics: Currency – Israeli New Shekel (ILS) Foreign exchange control – There are no foreign currency restrictions. Accounting principles/financial statements – Accepted accounting principles according to Israeli accounting standards board/IFRS. Financial statements must be prepared annually (quarterly for a public company). Principal business entities – These are the public and private limited liability company, partnership (registered and non-registered) and branch of a foreign corporation. Corporate taxation: Residence – A corporation is deemed to be resident in Israel if its activities are managed and controlled from Israel or if it is organized under the laws of Israel. A foreign corporation managed and controlled by a new Israeli resident or a senior returning resident (i.e. an individual who spent 10 years abroad) generally will not be classified as an Israeli resident company for a benefited period of 10 years. Basis – Israeli resident companies are subject to tax on worldwide profits and gains, with credit granted for overseas taxes. A nonresident company is subject to tax only on Israeli-source profits, which include, inter alia, income of an Israeli permanent establishment (PE) or income accrued and produced in Israel, as well as capital gains from the sale of Israeli assets. Taxable income – For a resident corporation, corporate income tax applies to all income regardless of where it arises. Israeli-resident companies are liable for capital gains tax on their worldwide capital gains. Taxation of dividends – The tax rate on dividends distributed by an Israeli resident company to another Israeli company is 0%, provided the dividends arise from income produced or accrued in Israel. The tax rate on dividends from income produced or

accrued abroad and from dividends derived from abroad is 25%, with credit granted for tax withheld. Alternatively, the gross dividend would be subject to the regular corporate tax rate with both a direct and indirect foreign tax credit if the Israeli company qualifies for the indirect tax credit mechanism. Dividends distributed by an “approved enterprise” are generally taxed at a rate of 15% if the distribution is made from profits attributable to the approved enterprise, or at a reduced rate of 4% on the alternative incentive track (the so-called “Ireland Track”). Capital gains – The capital gains tax rate depends on the purchase date and the nature of the asset. The general capital gains tax rate for a corporation is the standard corporate tax rate. The inflationary component of the gain (accrued as of 1 January 1994) is exempt from tax for both corporations and individuals. An Israeli resident is subject to capital gains tax in Israel on the disposal of all its assets regardless of whether the assets are located in Israel. Capital gains derived from the sale, exchange, transfer or other disposition of tangible and intangible capital assets located in Israel or constituting a direct or indirect ownership interest of assets in Israel, are treated as Israeli-source income and subject to Israeli capital gains tax, regardless of whether the seller is a resident in Israel for Israeli tax purposes. Shares and other securities of Israeli companies, or shares and other securities of non-Israeli companies holding their main assets in Israel, may be treated as Israeli assets. However, persons who are not resident in Israel for tax purposes are exempt from Israeli capital gains tax on gains from the sale of shares traded on the Tel Aviv stock exchange and gains from the sale of shares of Israeli companies traded on stock exchanges overseas acquired after listing, unless the gain is attributable to a PE the seller maintains in Israel. Nonresidents are also exempt from tax on gains derived from the sale of shares allocated to them by an Israeli-resident company in consideration for

their capital investment, provided the allocating company was qualified, at the time of the allocation, as a "Research and Development (R&D) Intensive Company." Additionally, an exemption from capital gains tax applies on the sale of Israeli securities acquired between 1 July 2005 and 31 December 2008 by residents of countries that have concluded a tax treaty with Israel, provided the gains are not attributable to a PE of the seller in Israel. A broad exemption from capital gains tax applies to gains derived from the sale of securities in Israeli or Israeli-related companies acquired on or after 1 January 2009 by all nonresidents (both entities and individuals), regardless of whether the nonresident is eligible for tax treaty benefits. This exemption is subject to several restrictions. The exemption does not apply (1) to shares of companies whose assets consist primarily (directly or indirectly) of real estate (i.e. land or buildings); (2) if the shares being sold were purchased from a related party or by way of certain tax-deferred reorganizations; (3) if the shares were held through a PE; or (4) when the nonresident selling entity is 25% or more controlled by Israeli residents. Losses – Trading or business losses may be offset against income from any source in the same year. Losses may be carried forward indefinitely to be offset against business income and business capital gains. Losses may not be carried back. Rate – The basic rate of company tax increased from 24% to 25% on 1 January 2012. Israeli companies classified as approved industrial enterprises are entitled to reduced tax rates (0%-25%), with the period of benefits depending on the location of the plant (Area A, Elsewhere) and whether certain conditions are satisfied. Qualified companies may be eligible for both reduced corporate tax rates and for grants from the Investment Center. There are no basic differences in the tax regime as it is applied to different forms of

business organizations. Partnerships are transparent for tax purposes. Surtax – No Alternative minimum tax – No Foreign tax credit – Israel grants a direct foreign tax credit on foreign taxes paid on non-Israeli-source income. An indirect tax credit is granted in certain cases. Participation exemption – A special tax regime applies to Israeli holding companies that invest in foreign corporations. Eligible corporations will be entitled to an exemption from tax on dividends received from qualified foreign subsidiaries and on capital gains derived from the sale of shares in such foreign subsidiaries, as well as a full exemption from tax on financial income derived from investments in the Israeli capital market. In addition, dividends paid by the holding company to nonresident shareholders will be subject to a 5% withholding tax, rather than the normal 25% rate. Holding company regime – See under "Participation exemption." Incentives – Various programs are available, e.g. foreign investment incentives (approved enterprise status, various tracks), a holding company regime and R&D incentives. See also “Rate,” above. Withholding tax: Dividends – A 25% withholding tax is levied on dividends paid to a controlling foreign resident shareholder (i.e. one that holds 10% or more of the Israeli payer’s shares for a period of 12 months before the payment); otherwise, the rate is 20%. These rates may be reduced under an applicable tax treaty or an incentives regime. Interest – A 15%, 20% or 25% withholding tax is levied depending, inter alia, on the type of loan (whether or not linked to the index) and whether the recipient of the interest income is an individual or a “body of persons.” These rates may be reduced under an applicable tax treaty. Royalties – A 25% withholding tax is levied on royalty payments to nonresidents. The rate may be reduced under a tax treaty. Technical service fees – See “Other,” below. Branch remittance tax – No Other – Other payments to non-Israeli corporations are subject to withholding tax at 25%. The rate may be reduced by treaty.

Other taxes on corporations: Capital duty – No Payroll tax – No Real property tax – Property betterment tax is applicable to the sale of real property. The principles of the property betterment tax are similar to those of the capital gains tax. From 2010, the betterment derived from the purchase date until the sale date will be subject to the corporate tax rate at the sale date. Social security – National insurance is required by law (covering allowances and stipends). Some employers pay part or all of employees’ compulsory contributions to the national insurance scheme. Stamp duty – No Transfer tax – See under "Real property tax." Other – A purchaser of real property is subject to a purchase tax (acquisition tax) at a rate of 5%. A purchase tax (also applicable to individuals) also is levied on certain imports or local industrial production and is collected from local manufacturers 30 days after the month in which the goods are sold and from the importer when the goods are released from customs. Anti-avoidance rules: Transfer pricing – The transfer pricing rules, based on the OECD guidelines, apply to transactions between an Israeli resident and its related nonresident. A hierarchy of transfer pricing methodologies applies, with preference given to transaction-based methods over profit-based methods. Documentation requirements mandate that the taxpayer attach a statement to the annual tax return and provide a detailed transfer pricing study at the request of the tax authorities. Advance pricing agreements may be obtained. Thin capitalization – No Controlled foreign companies – A foreign company “controlled” by Israeli shareholders that has accumulated undistributed passive profits taxed at a rate lower than 20% will be considered a CFC. In such a case, the Israeli controlling member will be treated as if it had received its proportionate share of profits as dividend income (deemed dividends). Simultaneously, a tax credit (a deemed credit) will be given to the Israeli controlling shareholder in the amount of the foreign tax that would have been paid if the undistributed

passive profits had been distributed as a dividend. Other – Artificial transactions may be subject to challenge. Disclosure requirements – The taxpayer generally must disclose all facts relevant for taxation, especially with respect to transactions with related parties. Administration and compliance: Tax year – The tax year begins in January, but this may be changed for special circumstances by application. Consolidated returns – The filing of a consolidated return is generally not permitted in Israel. Each company in a group is required to file its own return. However, if certain conditions are satisfied, qualified “industrial companies” may file a consolidated return for tax purposes. Filing requirements – Companies must file an annual tax return no later than 5 months after the end of the tax year (an extension to file may be obtained in certain circumstances). The tax authorities determine advance tax payments, with some taxpayers required to pay according to monthly turnover. Penalties – Penalties apply if advance payments are overdue or if tax returns are filed late. The balance of any tax due is payable from the beginning of the following tax year and is linked to the consumer price index. Any overdue tax balance attracts interest at an additional 4% plus the inflation rate until paid in full. Rulings – Taxpayers may request a ruling on the tax consequences of a proposed transaction. Personal taxation: Basis – Israeli residents are taxed on their worldwide income. Nonresidents are taxed only on Israeli-source income. Residence – An individual is resident in Israel if his/her “center of vital interests” is in Israel. The number of days spent in Israel and overseas also affects residence status: an individual will be deemed to be resident if he/she spent 183 days or more in Israel or if in the current tax year he/she spends 30 or more days in Israel, and the total staying period in Israel in the tax year and in the 2 preceding tax years on a cumulative basis amounts to 425 days or more. An Israeli resident who spends 2 consecutive years abroad (183 days each year) and

whose center of vital interests in the 2 subsequent years was located abroad will be deemed to be a foreign resident from the date the individual chose to leave Israel. Filing status – A married couple living together may opt for separate assessment in certain circumstances. Taxable income – All income from employment and business is taxable, including the value of fringe benefits and cost-of-living allowances. Passive income from bank deposits and savings, both in Israel and overseas, also are taxable. New Israeli residents and senior returning residents are entitled to a tax exemption for certain types of foreign-source income for a period of 10 years starting from the date of immigration/return to Israel. The benefit period may be extended for a maximum additional 10-year period provided certain investment criteria are fulfilled and approval is obtained from the Minister of Finance. Capital gains – Capital gains tax may arise on the sale of assets. A 25% tax applies on gains derived by noncontrolling shareholders (i.e. those holding less than 10% of the Israeli company payer’s shares) from the disposal of company securities; otherwise, the rate is 30% from 1 January 2012 onwards. Deductions and allowances – Deductions are granted for pension fund contributions and individuals are entitled to various personal allowances. Rates – The maximum personal marginal tax rate for earned income for 2012 is 48%. Other taxes on individuals: Capital duty – No Stamp duty – No Capital acquisitions tax – No Real property tax – Property betterment tax is applicable to the sale of real property. The principles of the property betterment tax are similar to those of the capital gains tax. With respect to assets purchased prior to 7 November 2001, the “betterment,” in real terms, derived from a purchase date up to 7 November 2001, will be subject to the marginal individual tax rate, whereas the balance of the betterment in real terms will be taxed at the marginal individual tax rates up

to 20% (for individuals). For assets that will be sold after 1 January 2012, the betterment accrued from 1 January 2012 up to the sale date, on a linear basis, will be subject to tax at the rate of 25%. A purchaser of real property is subject to purchase tax (acquisition tax) at a rate of 5%. However, based on a temporary tax regulation (in force from 21 February 2011 until 31 December 2012), various (progressive) rates ranging from 0%-7% apply to the purchase of a residence, depending on the number of purchased residential properties and the purchase price. Inheritance/estate tax – No Net wealth/net worth tax – No Social security – National insurance is required by law (covering allowances and stipends for pensioners, widow/ers, disability, maternity, children’s allowances, industrial accidents, military service pay and unemployment). Some employers pay part or all of workers’ compulsory contributions to the national insurance scheme. Administration and compliance: Tax year – Calendar year Filing and payment – Individuals must file an annual tax return no later than 30 April of the following year (an extension to file may be obtained in certain circumstances). Certain filing exemptions are granted. A new Israeli resident and a senior returning resident will not be subject to the reporting requirements in Israel on income derived from or accrued outside Israel, or sourced from assets outside Israel for the 10-year benefited period. Penalties – Penalties apply if advance payments are overdue or if tax returns are filed late. The balance of any tax due is payable from the beginning of the following tax year and is linked to the consumer price index. Any overdue tax balance attracts interest at an additional 4% plus the inflation rate until paid in full. Value added tax: Taxable transactions – VAT applies to most goods and services, including imported goods and services.

Rates – The standard VAT rate is 16%. Certain items are zero rated, including exported goods, intangible goods and the provision of certain services to nonresidents, tourism services, the transport of cargo to and from Israel, the sale of goods and services to the Eilat free-trade zone and the sale of fresh fruit and vegetables. Registration – An Israeli company must generally register for VAT purposes. A foreign company registered in Israel, or a non-registered foreign company that carries on an activity or business in Israel, must notify the VAT office closest to its place of business within 30 days from the date of commencing its activity in Israel through a representative in Israel. Filing and payment – The dealer will collect VAT on the goods, services or assets it sells. The VAT collected will be transferred to the VAT authorities once a month or once every 2 months, whichever is determined more appropriate by the authorities based on the annual turnover’s projection (once a month if annual turnover is higher than approximately NIS 1,500,000). Against this, the dealer may claim a refund on the VAT it pays for goods, services or assets that it purchases in the course of doing business. The annual revenue threshold to qualify as an “exempt dealer” under the VAT law is NIS 100,000 (increased from NIS 73,300). Such dealers are exempt from output VAT and receive relief from filing periodic VAT returns (other than the annual declaration reporting annual turnover), but can still claim input VAT (subject to several exceptions). Source of tax law: Income Tax Ordinance 1961 and accompanying regulations Tax treaties: Israel has more than 40 tax treaties. Tax authorities: Ministry of Finance, Israel Tax Authority International organizations: WTO Deloitte contact Yitzchak Chikorel E-mail:

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